DB Plans Offer “Immense” Potential

Insurance carriers looking to reinvent themselves in other business lines have a major opportunity to do so through pension buyouts and pension buy-ins as plan sponsors look to shore up plan assets, according to a new report from Cerulli Associates.

With interest rates still low and the insurance industry pulling back on the supply of annuities by raising prices and tightening up the generosity of features, life insurance companies need to look to generate growth through non-traditional sources, the report said. One of those sources is U.S. pensions, which still control as much as $6.7 trillion in assets.

Strong demand for income guarantees also means insurance carriers are in a position to take advantage of unfolding opportunities in the defined benefit (DB) marketplace by acquiring domestic plan assets through buyouts or hedging through buy-ins, according to the report, “Annuities and Insurance 2013: Balancing Shrinking Supply and Increasing Demand for Guarantees.”

“If the U.K. market is an indicator of things to come, insurers may have the potential to capture immense domestic pension assets, whether hedging a portion of the liabilities via a buy-in, fully acquiring the assets through a buyout, or continuing to capture retail and rollover assets,” said Donnie Ethier, senior analyst at Cerulli.

Pension buyouts eliminate risk for well-funded plan sponsors as assets and liabilities are transferred to the insurer, the report said. Plan sponsors also are relieved of funding pension obligations and dealing with accounting details. Insurers secure benefits to plan participants through annuitization.

Buy-ins, in which insurance carriers invest in underfunded pension plans, transfer some of the risk to the insurer and allow pension plans to hold annuities as an asset class. That removes some of the sponsors’ funding volatility and provides guaranteed income to the plan, the report said.

The pension strategies represent a trend of “increasing product development and reinvention” in other lines of business, Ethier said in a news release. But plan sponsors looking for help from life insurers, will have to conduct “vast due diligence,” as pension plans are heavily regulated.

In addition to looking for help from insurance companies, plan sponsors have reduced their exposures by offering lump sum payouts to retirees.

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].